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Some Progress on Occupational Licensing but Much More Needed

Assistant Director, L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity, Florida State University

Summary

Regardless of the exact mechanism, the evidence shows that it’s very difficult to de-license occupations. Over the last couple of years marginal improvements have been made, but there is still a lot of work to do.

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Occupational licensing, which prevents workers from entering certain occupations without government permission, has received a lot of attention over the last several years. The restrictions usually take the form of costly training requirements that result in state-approved certification, and the occupations impacted include some that may surprise you: hair stylists, auctioneers, opticians, morticians, barbers and interior designers to name a few. The chart on the left from my colleagues at Mercatus depicts the average time and money costs levied on workers in order to get a license for several different occupations.

Several studies (e.g. here, here and here) have linked occupational licensing to decreases in worker mobility and the decline in labor force participation since the recession. This has caused prominent researchers and politicians, including former President Obama, to encourage state officials to implement reforms.

Some might be concerned that less occupational licensing will lead to less consumer safety, but for many currently licensed occupations the evidence suggests otherwise. In a recent Brookings report, economist Morris Kleiner notes that:

“Economic studies have found little impact of occupational licensing on service quality in occupations that are not widely licensed; even in occupations that are widely licensed, studies have found few impacts of tougher requirements for licensing on health measures or quality outcomes.”

This research suggests there is plenty of room for reforms that reduce the burdens of occupational licensing without compromising safety.

Since the calls for reform there have been several successes, as well as some failures. In South Dakota, a law was recently signed that exempts natural hair braiders from the state’s cosmetology restrictions. Prior to the exemption, at least 2,100 hours of training were required to obtain a cosmetology license to braid hair legally.

A related success occurred in Illinois, where a law was passed that made it harder for the state’s Department of Financial and Professional Regulation to bar people with past criminal convictions from obtaining a license to be a barber or nail technician, along with several other occupations.

Nebraska’s legislature is thinking about changing several regulations impacting barbers, cosmetologists and massage therapists. While the proposed changes do not remove all restrictions, which is the ideal policy, they do improve the status quo. For example, the number of training hours needed for a barber or cosmetology license would be reduced from 2,100 to 1,500.

Nebraska, along with Florida, also wants to make it easier for military spouses who are licensed in other states to work if they are forced to relocate with their spouse. Nebraska’s proposed legislation would only apply to nurses, while Florida’s is broader in scope. Both are a good first step, but military spouses shouldn’t be the only people relieved of the burdens of obtaining a new license after a move.

In light of these success stories and general worries about occupational licensing’s effect on the labor market, policy makers and citizens are calling for similar reforms in other states, including New Mexico, Wisconsin, and Mississippi. This is a good sign for continued progress.

Unfortunately, there have also been some failures. In North Dakota, a bill that would have allowed dental therapists to work in the state in an effort to expand access to dental care was voted down. In a textbook example of rent seeking, several lawmakers who were against the bill cited the concerns expressed by their own personal dentists as a reason for their opposition.

The North Dakota example shows why it’s so hard to reform occupational licensing. Licensing requirements are in place for a reason, and often that reason is to protect established practitioners from new competition. Studies have shown that licensing is associated with higher wages due in part to its effectiveness as a barrier to entry. It’s not surprising that workers who have already gone through the hassle of obtaining a license, and are earning higher wages as a result, don’t want to give that up.

The strong influence that current workers have on policy is a big reason why there have been few successful de-licensing efforts. In a study published in the BLS’s Monthly Labor Review last summer, the authors discovered only eight successful cases of complete de-licensing of an occupation since 1975.

They offer several reasons for why this might be, including the aforementioned rent seeking and a ratchet effect that results from grandfather clauses, which are clauses that protect existing workers from any new licensing requirements. As a result of these clauses, the wage gains—and cost increases—from licensing happen slowly over time as people grandfathered in by the new licensing requirements retire and are not replaced by new workers due to the licensing.

However, if licensing is removed, wage losses would occur more quickly than the wage gains as people entered the profession quicker than they left. The speed at which the wage losses would occur relative to the slowness of the gains makes it more difficult to de-license occupations than to license them.

Regardless of the exact mechanism, the evidence shows that it’s very difficult to de-license occupations. Over the last couple of years marginal improvements have been made, but there is still a lot of work to do. However, it’s encouraging to see so many states making progress and taking occupational licensing reform seriously, and hopefully there are many more success stories in the near future.

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